Midway Maritime and Technological Foundation vs. Castro, et al.

A lessee is estopped from denying the lessor's title to the leased premises at the time of the commencement of the landlord-tenant relation, and a building is a real or immovable property distinct from the land on which it is constructed, such that a purchaser of the land acquires no right greater than what the seller had over the building.

The petitioner Midway Maritime and Technological Foundation is the lessee of two parcels of land in Cabanatuan City, and its president, Dr. Sabino Manglicmot, is married to Adoracion Cloma, the registered owner of the land under Transfer Certificate of Title Nos. T-71321 and T-71322. The respondents, the children of Louis Castro, Sr., own the residential building standing on a portion of the property. The land had been mortgaged by Cabanatuan City Colleges, of which the elder Castro was president, to Bancom Development Corporation; after foreclosure, the property was sold at public auction to Bancom, whose credit was later assigned to Union Bank of the Philippines. Prior related litigation, Castro, Jr. vs. CA, had already resolved that the residential building owned by the respondents should not have been included in the writ of possession issued in favor of Union Bank, as CCC had no title over it.

The petitioner Midway Maritime and Technological Foundation is the lessee of two parcels of land in Cabanatuan City. Its president, Dr. Sabino Manglicmot, is married to Adoracion Cloma, the registered owner of the property under Transfer Certificate of Title Nos. T-71321 and T-71322. Inside the property stands a residential building owned by the respondents, the children of Louis Castro, Sr.

The two parcels of land were originally owned by the respondents' father, Louis Castro, Sr., who was also the president of Cabanatuan City Colleges (CCC). On August 15, 1974, Castro mortgaged the property to Bancom Development Corporation to secure a loan. During the subsistence of the mortgage, CCC's board of directors agreed to a 15-year lease of a portion of the property to the Castro children, the herein respondents, who subsequently built the residential house now in dispute. The lease was to expire in 1992.

When CCC failed to pay its obligation, Bancom foreclosed the mortgage and the property was sold at public auction in 1979, with Bancom as the highest bidder. Bancom thereafter assigned the credit to Union Bank of the Philippines, and later on, Union Bank consolidated its ownership over the properties in 1984 due to CCC's failure to redeem the property. When Union Bank sought the issuance of a writ of possession over the properties, which included the residential building, the respondents opposed the same. The case reached the Court in G.R. No. 97401, Castro, Jr. vs. CA, and in a Decision dated December 6, 1995, the Court ruled that the residential house owned by the respondents should not have been included in the writ of possession issued by the trial court as CCC had no title over it.

In the meantime, Adoracion's father, Tomas Cloma, bought the two parcels of land from Union Bank in an auction sale conducted on July 13, 1993. Tomas subsequently leased the property to the petitioner and thereafter sold the same to Adoracion. Several suits were brought by the respondents against the petitioner, including the case at bench, which is an action for Ownership, Recovery of Possession and Damages, docketed as Civil Case No. 3700 (AF).

In their Amended Complaint dated April 19, 2000, the respondents alleged that they are the owners of the residential building subject of the dispute, which they used from 1977 to 1985 when they left for the United States of America and instituted their uncle, Josefino C. Castro, as the caretaker. Manglicmot, who was the President of the petitioner, leased the building (except for the portion occupied by Josefino) from Lourdes Castro, mother of the respondents, in June 1993 with monthly rent of ₱6,000.00, which was later to be increased to ₱10,000.00 in October 1995 after Josefino vacated his occupied portion. The petitioner failed to pay rent starting August 1995, thus prompting the respondents to file the action. The respondents prayed that they be declared as the owners of the residential building, and that the petitioner be ordered to vacate the same and pay rent arrearages and damages.

The petitioner, however, denied respondents' ownership of the residential building and claimed that Adoracion owns the building, having bought the same together with the land on which it stands.

The RTC found that from June 1993 to July 25, 1995, or for a period of 26 months, the petitioner had been paying rentals for the building in question and paid a rental of ₱156,000.00, which rental was increased to ₱10,000.00 beginning October 1995 when the caretaker Josefino Castro was ejected therefrom and the entire building was leased to the petitioner, represented by Dr. Sabino Manglicmot. Exhibit "J" for the respondents, a cash disbursement voucher issued by the petitioner to Mrs. Lourdes Castro, contained the statement "payment of building rentals x x x from June 01 to December 01, 1993" in the total amount of ₱36,000.00.

• Sale Included Improvements: Petitioner contended that when Tomas bought the two parcels of land from Union Bank in 1993, the sale included the improvements thereon, one of which was the residential house in dispute.
• Expired Lease: Petitioner argued that the lease between CCC and the respondents had already expired at the time of the sale, and that the petitioner is now the current lessee of the property, albeit the residential house is still standing inside the school compound.
• Reliance on Ejectment Decision: Petitioner relied on the decision of the RTC of Cabanatuan City, Branch 26, in Civil Case No. 2939 (AF), which stated that "in the advertised sale of the lots covered by TCT Nos. T-45816 and [T-45817] of the land records of Cabanatuan City, all improvements were included, hence, the instant case has no factual and legal basis."

• Existence of Lease: Whether there was a lease agreement between the petitioner and the respondents as regards the residential building.
• Estoppel Against Tenant: Whether the petitioner is estopped from denying the respondents' ownership of the residential building.
• Ownership of the Building: Whether the sale of the two parcels of land to Tomas, and later to Adoracion, included the residential building owned by the respondents.
• Expiry of the CCC Lease: Whether the lease between CCC and the respondents had expired at the time Adoracion bought the property.

• Existence of Lease: Yes. The RTC's factual finding that a lease agreement existed was borne by the records, particularly Exhibit "J," a cash disbursement voucher showing the petitioner's payment of building rentals to Mrs. Lourdes Castro.
• Estoppel Against Tenant: Yes. A lessee cannot deny the lessor's title at the time of the commencement of the landlord-tenant relation, and the petitioner's claim of Adoracion's ownership did not fall within the exception.
• Ownership of the Building: No. The auction sale to Tomas covered only the two parcels of land and did not include the residential house, which the respondents owned; the final judgment in Castro, Jr. vs. CA bound the petitioner.
• Expiry of the CCC Lease: No. The petitioner failed to substantiate its claim that the lease had expired, and the subsequent purchasers, all of whom knew of the lease, never moved to terminate it.

• Existence of Lease: The threshold issue was whether a lease agreement existed between the petitioner and the respondents over the residential building. This was a question of fact that the RTC had resolved in the affirmative, finding that from June 1993 to July 25, 1995, or for a period of 26 months, the petitioner had been paying rentals for the building and had paid a total of ₱156,000.00, with the rental increased to ₱10,000.00 beginning October 1995 when the caretaker Josefino Castro was ejected and the entire building was leased to the petitioner. This finding was borne by the records: Exhibit "J," a cash disbursement voucher issued by the petitioner to Mrs. Lourdes Castro, contained the statement "payment of building rentals x x x from June 01 to December 01, 1993" in the total amount of ₱36,000.00. The petitioner's payment of these rentals confirmed the existence of its agreement to lease the residential building from the respondents.

• Estoppel Against Tenant: Given the existence of the lease, the petitioner's claim denying the respondents' ownership of the residential house had to be rejected. It is settled that once a contract of lease is shown to exist between the parties, the lessee cannot by any proof, however strong, overturn the conclusive presumption that the lessor has a valid title to or a better right of possession to the subject premises than the lessee. Section 2(b), Rule 131 of the Rules of Court prohibits a tenant from denying the title of his landlord at the time of the commencement of the relation of landlord and tenant between them. In Santos vs. National Statistics Office, the Court clarified that what a tenant is estopped from denying is the title of his landlord at the time of the commencement of the landlord-tenant relation; if the title asserted is one alleged to have been acquired subsequent to the commencement of that relation, the presumption will not apply. Here, the petitioner's basis for insisting on Adoracion's ownership dated back to the latter's purchase of the two parcels of land from her father, Tomas. Tomas bought the property in an auction sale by Union Bank in 1993 and leased the same to the petitioner in the same year. The petitioner's president, Manglicmot, is the husband of Adoracion and the son-in-law of Tomas. It was not improbable that at the time the petitioner leased the residential building from the respondents' mother in 1993, it was aware of the circumstances surrounding the sale of the two parcels of land and the nature of the respondents' claim over the residential house. Yet the petitioner still chose to lease the building. Consequently, the petitioner was estopped from denying the respondents' title over the residential building.

• Ownership of the Building: More importantly, the respondents' ownership of the residential building was already an established fact. Under the principle of nemo dat quod non habet, one can sell only what one owns or is authorized to sell, and the buyer can acquire no more right than what the seller can transfer legally. What Tomas bought from Union Bank in the auction sale were the two parcels of land originally owned and mortgaged by CCC to Bancom, and which mortgage was later assigned by Bancom to Union Bank. Contrary to the petitioner's assertion, the property subject of the mortgage and consequently the auction sale pertained only to these two parcels of land and did not include the residential house. This was precisely the tenor of Castro, Jr. vs. CA, where the Court nullified the writ of possession issued by the trial court insofar as it affected the residential house constructed by the respondents on the mortgaged property, as it was not owned by CCC, the mortgagor. The Court there ruled that Article 2127 of the Civil Code extends the effects of a real estate mortgage to accessions and accessories found on the hypothecated property when the secured obligation becomes due, but the law is predicated on the assumption that the ownership of such accessions and accessories also belongs to the mortgagor as the owner of the principal; improvements are considered incorporated only if owned by the mortgagor, since a contract of security requires as an indispensable element the ownership by the pledgor or mortgagor of the property pledged or mortgaged, and a foreclosure would be ineffective unless the mortgagor has title to the property to be foreclosed. When a decision becomes final and executory, it becomes valid and binding upon the parties and their successors in interest. Castro, which already determined with finality the respondents' ownership of the residential house in question, was applicable and binding in this case, and the petitioner could not be allowed to challenge the same. As the CA correctly ruled, the pronouncement resolving the said issue necessarily touched also the issue on the ownership of the building, and the finding of the Court in Castro, being final and executory, was no longer open for inquiry and had attained its immutability. As regards the ruling of the RTC of Cabanatuan City, Branch 26, in Civil Case No. 2939 (AF) that the advertised sale of the property included all the improvements thereon, that case involved an action for ejectment, and any resolution by the RTC on the matter of the ownership of the improvements was merely provisional and could not surpass the Court's pronouncement in Castro and in the present case. In ejectment suits, the only issue for resolution is the physical or material possession of the property involved, independent of any claim of ownership by any of the party litigants; the issue of ownership may be provisionally ruled upon for the sole purpose of determining who is entitled to possession de facto. The MTC and RTC's adjudication of ownership was merely provisional and would not bar or prejudice an action between the same parties involving title to the property. Also, Adoracion's subsequent acquisition of the two parcels of land from her father did not necessarily entail the acquisition of the residential building, since a building by itself is a real or immovable property distinct from the land on which it is constructed and therefore can be a separate subject of contracts. Whatever Adoracion acquired from her father was still subject to the limitation pronounced by the Court in Castro, and the sale between Adoracion and Tomas was confined only to the two parcels of land and excluded the residential building owned by the respondents. It was beyond question that Tomas, and subsequently Adoracion, could not have acquired a right greater than what their predecessors-in-interest — CCC and later, Union Bank — had.

• Expiry of the CCC Lease: The petitioner also insisted that the lease between CCC and the respondents had already expired when Adoracion bought the property from Tomas. This issue, however, could not be considered in the present action. The residential house is located on a portion of the property that was leased by CCC to the respondents. Disputing the lease between CCC and the respondents, in effect, went into the right of the respondents to maintain the residential house in question and eventually their right to have the same leased to the petitioner. Such argument was a disguised effort to contest the title of the respondents over the residential house leased to the petitioner, which could not be allowed since they were estopped from denying the same. There was also nothing on record that would prove the petitioner's claim that the lease between CCC and the respondents had already expired. The fact that Adoracion subsequently bought the property did not ipso facto terminate the lease. While the lease between CCC and the respondents contained a 15-year period, to end in 1992, the petitioner failed to show that the subsequent transferors or purchasers of the two parcels of land opted to terminate the lease or instituted any action for its termination. Bancom bought the property at an auction sale in 1979; Union Bank in 1984; Tomas, and later Adoracion, acquired the property in 1993. Article 1676 of the Civil Code provides that the purchaser of a piece of land which is under a lease that is not recorded in the Registry of Property may terminate the lease, save when there is a stipulation to the contrary in the contract of sale, or when the purchaser knows of the existence of the lease. It could not be denied that the transferors or purchasers of the property all had knowledge of the lease between CCC and the respondents; yet none of them moved to terminate the lease. In Bernabe vs. Judge Luna, the Court stated that petitioners are in error when they say that because they are the buyers of the lot involved, they ipso facto have the right to terminate an existing lease; they can do so but only if the lease itself is not recorded, and they, as buyers, are not aware of the lease's existence and duration. In the present case, the lease was not recorded, and although the petitioner knew of its existence, there was no fixed period for its duration, hence the lease was generally terminable at the will of the buyers-petitioners, but they had to make a demand for its termination. This was the significance of the Court's statement in Castro that, in respect of the lease on the foreclosed property, the buyer at the foreclosure sale merely succeeds to the rights and obligations of the pledgor-mortgagor subject, however, to the provisions of Article 1676 of the Civil Code on its possible termination. Given the lack of substantiation, the petitioner's insistence on the expiry of the lease between CCC and the respondents had to fail.

• Estoppel Against a Tenant — A tenant is estopped from denying the title of his landlord at the time of the commencement of the landlord-tenant relation. Once a contract of lease is shown to exist between the parties, the lessee cannot by any proof, however strong, overturn the conclusive presumption that the lessor has a valid title to or a better right of possession to the subject premises than the lessee. The estoppel applies only to the title existing at the commencement of the relation; if the title asserted is one alleged to have been acquired subsequent to the commencement of that relation, the presumption will not apply. In this case, the petitioner leased the residential building from the respondents' mother in 1993 and paid rentals therefor; it was therefore estopped from denying the respondents' title, and its claim that Adoracion acquired ownership did not fall within the exception because the petitioner's own basis for that claim dated back to the 1993 auction sale to Tomas, which coincided with the commencement of the lease.

• Nemo Dat Quod Non Habet — One can sell only what one owns or is authorized to sell, and the buyer can acquire no more right than what the seller can transfer legally. The Court applied this principle in holding that what Tomas bought from Union Bank in the auction sale were only the two parcels of land originally owned and mortgaged by CCC to Bancom, and did not include the residential house owned by the respondents. Tomas, and subsequently Adoracion, could not have acquired a right greater than what their predecessors-in-interest — CCC and later, Union Bank — had.

• Building as a Real Property Distinct from the Land — A building by itself is a real or immovable property distinct from the land on which it is constructed and therefore can be a separate subject of contracts. The Court applied this doctrine in holding that Adoracion's subsequent acquisition of the two parcels of land from her father did not necessarily entail the acquisition of the residential building, and that the sale between Adoracion and Tomas was confined only to the two parcels of land and excluded the residential building owned by the respondents.

• Immutability of Final Judgments — When a decision becomes final and executory, it becomes valid and binding upon the parties and their successors in interest. The Court applied this doctrine in holding that Castro, Jr. vs. CA, which had already determined with finality the respondents' ownership of the residential house, was applicable and binding in this case, and the petitioner could not be allowed to challenge the same.

• Provisional Adjudication of Ownership in Ejectment Cases — In ejectment suits, the only issue for resolution is the physical or material possession of the property involved, independent of any claim of ownership by any of the party litigants. The issue of ownership may be provisionally ruled upon for the sole purpose of determining who is entitled to possession de facto. Such adjudication is merely provisional and would not bar or prejudice an action between the same parties involving title to the property. The Court applied this doctrine in holding that the RTC Branch 26 ruling in Civil Case No. 2939 (AF) — that the advertised sale included all improvements — could not surpass the Court's pronouncement in Castro and in the present case.

• Termination of Lease by a Purchaser under Article 1676 — The purchaser of a piece of land which is under a lease that is not recorded in the Registry of Property may terminate the lease, save when there is a stipulation to the contrary in the contract of sale, or when the purchaser knows of the existence of the lease. In this case, the transferors and purchasers all had knowledge of the lease between CCC and the respondents, yet none of them moved to terminate the lease; the petitioner failed to substantiate its claim that the lease had expired.

• "Once a contact of lease is shown to exist between the parties, the lessee cannot by any proof, however strong, overturn the conclusive presumption that the lessor has a valid title to or a better right of possession to the subject premises than the lessee." — This passage states the ratio decidendi on estoppel against a tenant, the doctrine that barred the petitioner from denying the respondents' ownership of the leased building.

• "Nemo dat quod non habet. One can sell only what one owns or is authorized to sell, and the buyer can acquire no more right than what the seller can transfer legally." — This passage states the canonical formulation of the nemo dat principle, which the Court used to hold that the auction sale to Tomas covered only the two parcels of land and did not include the respondents' residential building.

• "A building by itself is a real or immovable property distinct from the land on which it is constructed and therefore can be a separate subject of contracts." — This passage defines the doctrine that a building is a distinct real property, which the Court applied in holding that Adoracion's acquisition of the land did not carry the residential building owned by the respondents.

• "when a decision becomes final and executory, it becomes valid and binding upon the parties and their successors in interest." — This passage states the doctrine of immutability of final judgments, which the Court applied in holding that the prior final judgment in Castro, Jr. vs. CA bound the petitioner and could no longer be challenged.

• Castro, Jr. vs. CA, 321 Phil. 262 (1995) — Controlling precedent. The Court's prior final judgment nullified the writ of possession insofar as it affected the residential house constructed by the respondents, holding that the mortgagor CCC had no title over it; this ruling was held applicable and binding in the present case under the doctrine of immutability of final judgments.
• Santos vs. National Statistics Office, G.R. No. 171129, April 6, 2011, 647 SCRA 345 — Followed. The Court clarified the rule on estoppel against a tenant, holding that what a tenant is estopped from denying is the title of his landlord at the time of the commencement of the landlord-tenant relation; if the title asserted is one alleged to have been acquired subsequent to the commencement of that relation, the presumption will not apply.
• Bernabe vs. Judge Luna, 232 Phil. 122 (1987) — Followed. The Court held that buyers of a lot do not ipso facto have the right to terminate an existing lease; they can do so only if the lease itself is not recorded, and they, as buyers, are not aware of the lease's existence and duration, and they must make a demand for its termination.
• Samelo vs. Manotok Services, Inc., G.R. No. 170509, June 27, 2012, 675 SCRA 132 — Cited for the rule that a lessee cannot by any proof, however strong, overturn the conclusive presumption that the lessor has a valid title to or a better right of possession to the subject premises than the lessee.
• Rufloe vs. Burgos, 597 Phil. 261 (2009) — Cited for the principle of nemo dat quod non habet.
• Malabanan vs. Rural Bank of Cabuyao, Inc., 605 Phil. 523 (2009) — Cited for the rule that in ejectment suits, the only issue is physical or material possession, independent of any claim of ownership, although ownership may be provisionally ruled upon for the purpose of determining possession de facto.
• Heirs of Albina G. Ampil vs. Manahan, G.R. No. 175990, October 11, 2012, 684 SCRA 130 — Cited for the rule that the adjudication of ownership in ejectment cases is merely provisional and would not bar or prejudice an action between the same parties involving title to the property.
• Sps. Alcaraz vs. Tangga-an, 449 Phil. 62 (2003) — Cited for the rule that a building by itself is a real or immovable property distinct from the land on which it is constructed and therefore can be a separate subject of contracts.
• Development Bank of the Philippines vs. Prudential Bank, 512 Phil. 267 (2005) — Cited for the rule that a purchaser cannot acquire a right greater than what the predecessors-in-interest had.
• Government Service Insurance System (GSIS) vs. Group Management Corporation (GMC), G.R. No. 167000, June 8, 2011, 651 SCRA 279 — Cited for the rule that when a decision becomes final and executory, it becomes valid and binding upon the parties and their successors in interest.
• R & M General Merchandise, Inc. vs. Court of Appeals, 419 Phil. 131 (2001) — Cited for the rule that the existence of a lease agreement is a question of fact.

• Article 2127, Civil Code — Extends the effects of a real estate mortgage to accessions and accessories found on the hypothecated property when the secured obligation becomes due. The Court explained that the law is predicated on the assumption that the ownership of such accessions and accessories also belongs to the mortgagor as the owner of the principal; improvements are considered incorporated only if owned by the mortgagor, since a contract of security requires as an indispensable element the ownership by the pledgor or mortgagor of the property pledged or mortgaged. Applied here, the residential building owned by the respondents was not covered by the mortgage and foreclosure because CCC, the mortgagor, did not own it.
• Article 1676, Civil Code — Provides that the purchaser of a piece of land which is under a lease that is not recorded in the Registry of Property may terminate the lease, save when there is a stipulation to the contrary in the contract of sale, or when the purchaser knows of the existence of the lease. The Court applied this provision in holding that the petitioner failed to show that the subsequent transferors or purchasers of the two parcels of land opted to terminate the lease, and that the petitioner's insistence on the expiry of the lease had to fail for lack of substantiation.
• Section 2(b), Rule 131, Rules of Court — Prohibits a tenant from denying the title of his landlord at the time of the commencement of the relation of landlord and tenant between them. The Court applied this provision in holding that the petitioner, having leased the residential building from the respondents' mother in 1993 and paid rentals therefor, was estopped from denying the respondents' title.
• Article 415, Civil Code — Cited in Sps. Alcaraz vs. Tangga-an for the proposition that a building is a real or immovable property distinct from the land on which it is constructed and therefore can be a separate subject of contracts.

• Chief Justice Maria Lourdes P. A. Sereno (Chairperson)
• Associate Justice Lucas P. Bersamin
• Associate Justice Martin S. Villarama, Jr.
• Associate Justice Jose Catral Mendoza